Brexit: Is the “WTO Option” a viable alternative?

Among British people who participated in the referendum on leaving the European Union, comfortably more than half seek a “soft Brexit.” This term usually refers to Brexit taking place with a negotiated trade deal or remaining in the single market. But a significant minority – about 45% of voters – still want a “hard Brexit,” without a deal and without any additional concessions to the EU. Since December 2017, Britain and the EU have ostensibly surmounted the biggest hurdles impeding trade talks: the divorce bill, the Ireland border question, and the rights of EU citizens in the UK. As Prime Minister Theresa May is so fond of saying, “nothing is agreed until everything is agreed.” The likelihood of a hard Brexit is diminishing, but is hardly implausible.

One argument these Brexiteers tend to advance in support of hard Brexit is the so-called “WTO Option.” The theory goes that, in the absence of an EU deal, Britain can rely upon EU’s World Trade Organisation concessions to enjoy trade terms with the bloc that are sufficient to support the economy while new deals are negotiated elsewhere. This position underestimates the benefits and feasibility of pursuing the WTO Option for several reasons.

Foremost, the WTO Option would simply yield worse terms for exporters than an EU free trade agreement or market access. Within the single market, trade between member states is completely liberalized. Outside of the single market, the standard rate is still quite low—about 1.5%—but this understates the burden that Brexit places on UK businesses. An agreement on service rights is the largest issue for the UK because insurance and finance make up a significant portion of GDP. WTO and GATS standards would grant only MFN rules and eliminate passporting rights. This means that Britain would receive treatment no more favorable than that extended to any WTO member outside other free-trade areas in services. PwC projects that financial services’ gross value added will decline by 9.5% in a no-deal situation. With respect to the trade of goods, the outlook is more varied. For some goods, the nominal tariff rate would be hardly noticeable. In other types of goods such as automobiles, the EU’s bound rate is 10%. Some agricultural products reach 40%. On balance, the Centre for Economic Performance predicts that reduced trade will yield a loss from 6.5% to 9.5% of GDP.

Beyond substantive economic concerns are the procedural impediments. Outside the single market, the UK must overcome the issue of its own tariff schedules. It is a founding member of the WTO, but negotiations have previously been handled directly by the EU. Brexit will make the UK a standalone member. Its schedules will require the assent of every other member. International Trade Secretary Liam Fox has stated that the transition will involve “zero disruptions,” because the UK will establish tariff schedules identical to those of the EU. Supposedly, this will mean that trade protections beyond the EU will be nominally identical post-Brexit.

However, the reality of the WTO Option is costlier. In October 2017, the United States declared that it would not accept an EU-UK plan to reapportion WTO agricultural quota commitments on the basis of historical trade flows. The White House claimed the plan is unfair because it would allow a member to reduce their obligations as WTO members, which requires unanimous assent of the membership. New Zealand, among others, objected because the plan would decrease the volume of lamb it could export to Britain before triggering higher tariff levels. Other scheduling is likely to incur objection, either because issues are ripe for renegotiation and the WTO’s unanimity requirement grants other countries bargaining power, or because Brexit changes substantively the value of its tariff schedules in a way that other states find unacceptable.

Assuming tariff scheduling succeeds, overcoming nontariff barriers will also require lengthy negotiation. States will demand border checks to ensure compliance with technical regulations, health requirements, and other provisions accounted for in the WTO Annex 1A treaties. Financial Times research suggests that Brexit will require the renegotiation of more than 750 separate bilateral negotiations worldwide, if it is unable to secure piggybacking rights on agreements already ratified as an EU member. These agreements are highly complex. Securing Mutual Recognition Agreements would cut some of the red tape, but will be negotiating challenges unto themselves: the EU-Australia Partnership Framework runs 130 pages. The complexity of the of the agreements mean that negotiating them will not be a quick process.

A trade agreement is immensely preferable to the WTO Option, not least because these WTO problems must be solved regardless of whether an EU trade deal is forged. The UK’s task in establishing tariff levels and related trade treaties will be costly and is likely to proceed at a snail’s pace. Brexit will be costly and inefficient. Deadweight losses will rise, and economies will contract. Deliberately excluding the possibility of mitigating those losses is self-harming. Although EU chief negotiator Michel Barnier has stated that an agreement will exclude financial services, an EU agreement can protect other sectors (on condition that the agreement itself is not sector-specific). The UK must either renegotiate its tariff schedules and forge new treaties. That will take years. The WTO Option is no substitute for a deal, and should not be thought of as such.

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